. XYZ stock is selling for $100 per share. Call options on XYZ with a

QUESTION

. XYZ stock is selling for $100 per share. Call options on XYZ with a strike price of $100 are selling at $5 per share. John invests $1,000 by buying 10 shares of XYZ. Pat invests $1,000 by buying 200 call options on XYZ (with a strike price of $100) and holds the options until just before they expi
a) Johns profit is ($110 $100) per share x 10 shares he bought = $100 b) I am unsure about the quoted convention here. In the real market 1 option contract represents 100 shares if you were to follow the wording in this question it would mean 1 option contract costs 100 shares x $5/share = $500 per option contract which isnt realistic. I will assume that is $5 per option contract, not share, meaning one option contract represents one share. This makes more sense, since in the question it says Pat bought 200 call options

r $1,000. Pats Profit is = ($110 $100) x 200 shares less option premium ($5 per option contract)] = ($10 x 200) 1,000 = 1,000 c) Do this by replacing $110 in the equations above with x, and equating them as follows. Then solve for x (x 100) 10 = (x-100)200 1,000 10x 1000 = 200x 20,000 1,000 190x = 20,000 x is approx $105.26 there is rounding

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